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S&P Downgrades Italy; Euro, Futures Tumble
As usual, a corrupt and pathetic Moody's continues to boldly not go where everyone else has gone before. Luckily, S&P, which had the balls to cut the US, has just done so to Europe's next domino, by downgrading Italy from A+ to A, outlook negative. Then again, this was pretty much telegraphed 100% earlier today as noted in "Italy Expected To Cut Growth Forecasts Further." Anyway, those incompetents from Moody's are next.
Full report:
Italy Unsolicited Ratings Lowered To 'A/A-1' On Weaker Growth Prospects, Uncertain Policy Environment; Outlook Negative
Overview
- Italy's net general government debt is the highest among 'A' rated sovereigns. We have revised our projections of Italy's net general government debt and now expect it to peak later and at a higher level than we previously anticipated.
- In our view, Italy's economic growth prospects are weakening and we expect that Italy's fragile governing coalition and policy differences within parliament will continue to limit the government's ability to respond decisively to domestic and external macroeconomic challenges.
- In our view, weaker economic growth performance will likely limit the effectiveness of Italy's revenue-led fiscal consolidation program.
- We have revised our base-case medium-term projections of real GDP growth to an annual average of 0.7% between 2011 to 2014, compared with our previous projection of 1.3% (see "Credit FAQ: Why We Revised The Outlook On Italy To Negative," published May 23, 2011). As part of our ratings analysis, we have also prepared upside and downside macroeconomic scenarios that could drive our future rating actions on Italy.
- We are lowering our long- and short-term unsolicited sovereign credit ratings on Italy to 'A/A-1' from 'A+/A-1+'.
- The negative outlook reflects our view of additional downside risks to public finances related to the trajectory of Italy's real and nominal GDP growth, and implementation risks of the government's fiscal consolidation program.
Rating Action
On Sept. 19, 2011, Standard & Poor's Ratings Services lowered its unsolicited long- and short-term sovereign credit ratings on the Republic of Italy to 'A/A-1' from 'A+/A-1+'. The outlook is negative. The transfer and convertibility assessment remains 'AAA', as it does for all members of the eurozone.
Rationale
The downgrade reflects our view of Italy's weakening economic growth prospects and our view that Italy's fragile governing coalition and policy differences within parliament will likely continue to limit the government's ability to respond decisively to the challenging domestic and external macroeconomic environment.
Under our recently updated sovereign ratings criteria, the "political" and "debt" scores were the primary contributors to the downgrade. The scores relating to the other elements of our methodology--economic structure, external, and monetary--did not contribute to the downgrade.
More subdued external demand, government austerity measures, and upward pressure on funding costs in both the public and private sectors will, in our opinion, likely result in weaker growth for the Italian economy compared with our May 2011 base-case expectations, when we revised the outlook to negative.
We believe the reduced pace of Italy's economic activity to date will make the government's revised fiscal targets difficult to achieve. Furthermore, what we view as the Italian government's tentative policy response to recent market pressures suggests continuing future political uncertainty about the means of addressing Italy's economic challenges.
In our opinion, the measures included in and the implementation timeline of Italy's National Reform Plan will likely do little to boost Italy's economic performance, particularly against the backdrop of tightening financial conditions and the government's fiscal austerity program (see "Italy Delivers", published by the Italian Ministry of the Economy and Finance at http://www.mef.gov.it/documenti/open.asp?idd=27880).
Our reduced expectations concerning Italy's growth prospects also reflect key structural impediments that we have written about before:
Low labor participation rates and tightly regulated labor and services markets;
What we consider to be an inefficient public sector; and
Relatively modest foreign investment inflows.
In our view, the authorities remain reluctant to tackle these issues (see our full analysis on Italy, published Dec. 1, 2010, on RatingsDirect on the Global Credit Portal). For example, we note that in the July 2011 political discussions about the Decree Law No. 98/2011 (converted into Law No. 111/2011), several proposed supply-side measures, including the liberalization of professional services, were shelved or delayed because of opposition within the governing coalition and in parliament.
The government projects that its fiscal consolidation program will result in a cumulative fiscal consolidation of about €60 billion, overall, with the largest savings projected in 2012 and 2013 (see "Italy Delivers", http://www.mef.gov.it/documenti/open.asp?idd=27880).
However, we think that the government's projection of a €60 billion savings may not come to fruition for three primary reasons:
First, as described below, we view Italy's economic growth prospects as weakening;
Second, nearly two-thirds of the projected budgetary savings in the crucial 2011-2014 period rely on revenue increases in a country already carrying a high tax burden; and
Third, market interest rates are anticipated to rise.
We have adopted a revised base-case macroeconomic scenario, which we view as consistent with the downgrade and negative outlook. Compared with the May 2011 base case, the revised base-case scenario assumes that annual real GDP growth will be 0.6 percentage points lower over the 2011-2014 forecast horizon because of more sluggish growth in exports, investment, and public- and private-sector consumption. Since May 2011, financial conditions in Italy have tightened and the pace of economic recovery of its principal global and eurozone trading partners has slowed. We also note that our revised base case is broadly similar to the downside (downgrade) scenario we published in May 2011.
We have also adopted a revised downside scenario, consistent with another possible downgrade. The revised downside assumes a mild recession takes hold next year, with real GDP declining by 0.6%, followed by a modest recovery in 2013-2014. The economic main drivers in our revised downside scenario are tighter financial conditions, with higher interest rates on government bonds, as well as weaker trajectories for private-sector consumption and exports.
We have also adopted a revised upside scenario, which, if it occurred, would be consistent with our view of a revision of the outlook to stable. Our revised upside scenario assumes that financial conditions will gradually improve, along with the trajectories for GDP growth, exports, and investment. For details of the revised base case and alternate scenarios, see our analysis on Italy, published Sept. 19, 2011.
Under all three scenarios, we expect that Italy's net general government debt burden will remain the key rating constraint for the foreseeable future. We project that such net debt will be 117% of GDP at year-end 2011, up from 100% of GDP in 2007.
Under our revised base case, the net debt burden would fall only slightly to 115% of GDP by 2014, a similar rate to the May 2011 downside scenario.
Our macroeconomic analysis also illustrates Italy's main credit weakness: Even under pressure, Italian political institutions, incumbent monopolies, public-sector workers, and public- and private-sector unions impede the government's ability to respond decisively to challenging economic conditions. For example, union opposition to the privatization of Alitalia in 2008 ended prospects for a takeover by Air France. Moreover, resistance in parliament in July 2011 led the government to drop proposals to liberalize professional services from its legislative agenda. Nontariff barriers to foreign direct investment (FDI) are, in our view, the key reason behind Italy's relatively low inbound FDI stock. At about 16% of GDP, it is less than one-half that of either France or Spain (36% and 43% of GDP, respectively) and lower than that of Germany (27%), despite Italy's potential efficiency gains from economic scale within Europe's common market.
With elections due in 2013, and the government's parliamentary position tenuous, it is unclear what can be done to break the deadlock between these political institutions and the government. As a result, we believe that Italy remains vulnerable to heightened fiscal, economic, and financial downside risks.
As noted above, the application of three elements of our recently updated sovereign ratings criteria--economic structure, external, and monetary--did not materially change our view from May 2011, when we revised the outlook on Italy to negative. We continue to score Italy as a high-income sovereign with a diversified economy and few external imbalances, albeit one with what we see as weak growth prospects.
In addition, we view both household and corporate balance sheets as relatively strong, which should enable the government to tap local savings on a scale that could permit a more gradual fiscal adjustment than for some of its southern European neighbors. As of year-end 2010, Italy's nonbank sector remains in a substantial net external creditor position, while the public sector's net external liability is equivalent to €804 billion (52% of GDP). We note that Italy's current account deficit has widened recently, to more than 10% of current account receipts, but we expect this to unwind.
We expect the government, given its tight fiscal position, will provide only limited direct assistance to the banking system in the near term, and we still expect most of the Tremonti bonds, which provided four banks' Tier I capital during the 2008-2009 recession, to be repaid this year.
Outlook
The negative outlook reflects Standard & Poor's view of risks to the Italian government's fiscal targets over 2011-2014, as well as the uncertainties on the timely implementation of growth-enhancing reforms. In our view, these risks would stem from weaker output growth than we currently assume in our revised base case. In addition, political gridlock could contribute to delayed policy responses to new macroeconomic challenges and result in significant fiscal slippage.
If one or more of these risks materializes, Italy's net general government debt could increase from its already high level. In that event, we could lower the long- and short-term ratings again. We could also lower the ratings if, against our expectations, the current account deficit remained higher than 10% of current account receipts beyond 2013. This would occur if Italy's trade balance did not improve or if the income deficits continued to widen because of rising refinancing costs.
On the other hand, if the government manages to gather political support for implementing growth-enhancing structural reforms, which in turn increase prospects for a material reduction in the net public debt burden in the medium term, we could affirm the ratings at the current level.
As is typical, ratings on issues and issuances dependent on these long- and short-term ratings may be revised as a result of today's rating action.
Futures not happy:
Neither is the Euro:
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Doesn't that scumbag....the obstinate one of Omaha own Moody's?
You all just need to believe in hope and change. Pass this new American Jobs Act and all will be good in the world. Don't you losers believe in hope and change ?
.GOV doesn't create Jobs. Higher taxes will not create Jobs.
Hopefully BO will not apply for second term or better yet donate his election campaign money back to the IRS.
There were jobs in USSR and they were 100% government jobs.
Military/police/courts/education/environmental regulation/parks/customs/border control all government jobs and necessary. Weapons construction is effectively a government job and also necessary. Medical is half government job in US and 100% elsewhere. The 100% case does it with less people and a better outcome at a lower cost.
All you have to do is lower standards in every way.
A lot lower.
Oh, and if you need anything, you have to go to a govt. flunkie and beg for it.
I dunno, I say we keep the Ratings Agencies. They're like Nigerian spam, they crack me up.
...the Moodys Market Whore of Babylon and Burlesconi P2 QEternity Phony Baloney, blaa haa haa haaaa. http://www.adnkronos.com/IGN/Aki/English/Politics/?id=3.1.2455572547
http://www.youtube.com/watch?v=4994186umUU
Seriously, I believe that over the next couple of years we'll see the Germanic Bloc leave the Euro and establish their own currency called the thaler. France, Italy and Spain will be left to guide the Eurozone thru to their socialist paradises.
...really? What gave it away? Was it around the 2 Minute (Johnny Duetch) Mark? Blaa haa haa http://www.youtube.com/watch?feature=player_embedded&v=U74ZueBopZU
http://www.youtube.com/watch?v=Xpf6tCnYRZs
Bloomberg has a lovely slide show of the small protest on Wall Street. It is elegantly designed to make these admirable human beings look stupid using their own words.
Kalan Sherrard, 24, ("I travel a lot") street performer
"It was a great idea occupying Wall Street. It's a little small and depressing."
No doubt the most damning and logical quotes were edited out straight away.
http://www.bloomberg.com/money-gallery/2011-09-19/portraits-of-peaceful-...
Thank you, protesters, for actually doing something.
austerity you can believe in. Not sure who hates it more the Greeks or Italians. GPap at least "goes along with the program".. Burlosconi ever the realist says the hell with it all.
I guess their yield will tank like ours did.
No we're different.
E-screw-U melt down begins in earnest. I hear all kinds of oinking, snorting, and squealing. When all the lies are swept away by the truth it will be ounces of gold & silver in your hand which count. With our propaganda media we'll get no truth out of bank runs, chaos, and financial confusion in the western bankstering E-screw-U meltdown. US banks well capitalized, EU contagion contained, & our USDinker dollar is strong. It's all strong smelling. No one should be fooled on this board, when the western bankstering corrupt paper monetary system, all comes down in a flash of flames.
Is Gold like the "Weeble Wobble", for those old enough to remember??? Why don't they call the shit that Europe needs to do what the fuck it is, namely: PRINT MONEY, FUCKSTICKS!!! That's the ONLY solution. No escaping this shit. You were told, you were warned, no fucking excuses. Once you go on that path, there are no alternatives except default or keep fucking printing. The only question then is who gets left holding the bag when the shit inevitably stops????
Just sold off the last of the Weebles over the weekend. They were tucked between G.I. Joe (Kung Fu Grip) and some 8-Tracks. Had to climb over Hippity Hoppity and the BigWheel to get to 'em.
Good rant, BTW. Biggest bagholders are those entirely dependent upon entitlements denominated in printed fiat.
I'm long ink (thats not a symbol...)
S&P downgrades Italy? No problem, already fixed, Futures moving back up. Uncle Ben getting ready for operation Twister v3.0 And Dollar Floating Tornado v1.0 :))) Only Bernank creates jobs in the USA in "Inc" and Paper industry anyways *LOL*
The only question that remains is which organization falls first, the Eurozone, the Big East or the Big 12?
CNBC reports this latest leg of the powder keg fuse as "a major surprise":
http://www.cnbc.com/id/44586211
If this is truly a major surprise to the predetermined narrative, it could be a gruesome day for those suckling on the equity-levitation-disreality teat...
Well, ain't that a BOOT to the ol' groin?
Copper slammed, commdities now getting sold. Looks like a major slowdown kicking in, as in China.
More USD levitation, which is a precursor to all things QE. Benocide can't don his cape if the DXY is hovering at a 73 handle. This is all giving some headroom (or headfake?) if needed to release the hounds...
so what rumor will save the market tomorrow?
How could S&P do this?
Now they are going to be required to announce 2 Greece bailouts tomorrow.
"S&P Downgrades Italy; Euro, Futures Tumble" and of course recover. POS market - When this SOB finally crashes ther will be nothing left but dust.
The Euro has plenty of room to fall against the USD. http://bit.ly/oYIfxA
It's a matter of time when Italians will be arriving on refugee boats...I'm sure some African country will be receptive to them.
i hear libya has many governmental openings
Camel skills are a plus.
"As usual, a corrupt and pathetic Moody's continues to boldly not go where everyone else has gone before. Luckily, S&P, which had the balls to cut the US, has just done so to Europe's next domino, by downgrading Italy from A+ to A, outlook negative."
s&p should really downgrade moody's.
would love to see the headline, "S&P downgrades moody's on substantial failures in core risk analysis business"
US to announce new China trade enforcement action
http://in.reuters.com/article/2011/09/19/idINIndia-59435820110919
The transfer and convertibility assessment remains 'AAA', as it does for all members of the eurozone.
What a fucking ridiculous joke. Italian bonds are A- now, but can be pledged as AAA collateral? And swapped for ...say... US dollars as AAA bonds? Meaning the Fed could buy them as AAA bonds?
This is so fucking ridiculous it defies comprehenshion. It shows just how insane these bankers have become.
And these criminally insane people are running the finances of Europe (and America).
These crazy looney-tunes insane people are going to absolutely crash the world financial system, take everyone right over the edge of the cliff into oblivion.
I don't see any reason why (I mean real one, looking at fundamentals of economy) why a US bond should trade better or worse than any european bond, Italian included. I hope Italy won't swap any BOT with dollars...
Anyway the final solution in the Bond's war is Bond... James Bond.
Ukrainian chicks--very sexy
12:00 20Sep11 RTRS-A CHINA STATE BANK HAS STOPPED FX SWAPS WITH UBS, SOCIETE GENERALE, CREDIT AGRICOLE, BNP PARIBAS -SOURCES
....move along, nothing to see here
I'd still give them an A, look at the Italian gold reserves.
Moody's can be likened to a woman having periods and S& P to a man with real balls.